Opinion: Venezuela’s impact

POSTED: 02/27/14 12:51 PM

“The population of Venezuela is revolting because the socialist State of Venezuela is out of money, rather out of dollars, and since most consumption goods are imported ( 80%) and not locally produced, out of food and everything else. The Bolivarian Revolution of Hugo Chavez spent more money than its economy produced and the shortfall could only temporarily be bridged by international loans, mostly from China, and the money press. The latter caused dramatic inflation ( 58%), and China is calling in its loans by barter of oil deliveries.

Cornered by a revolting and hungry crowd, international pressure, and a standstill of its entire economy, the Venezuelan government has no choice but to change the Petrocaribe-oil alliance with its 17 members, and charged much higher prices, or eliminate the agreement all together. The effect on the economies of all these 17 countries could be dramatic, especially, on the already very weak economy of Cuba.

1. “Petrocaribe is an oil alliance of many Caribbean states with Venezuela to purchase oil on conditions of preferential payment. The alliance was launched on 29 June 2005 in Puerto La Cruz, Venezuela. In 2013 Petrocaribe agreed links with the Bolivarian Alliance for the Americas (ALBA), to go beyond oil and promote economic cooperation.

The payment system allows for purchase of oil at market value for 5%-50% up front, with a grace period of one to two years; the remainder can be paid through a 17-25 year financing agreement with 1% interest if oil prices are above US$40 per barrel. Petrocaribe accounts for 30% of Venezuela’s production. There are a total of 17 members, plus Venezuela; 12 of the members are from the 15 member CARICOM (excluding, Barbados, Montserrat and Trinidad and Tobago). At the first summit, 14 countries joined the alliance. These were: Antigua and Barbuda, the Bahamas, Belize, Cuba, Dominica, Dominican Republic, Grenada, Guyana, Jamaica, St Lucia, St Kitts and Nevis, Saint Vincent and the Grenadines, Suriname and Venezuela. At the third summit, Haití and Nicaragua joined the union. Guatemala joined in July 2008 but left the organization in November 2013 stating that Venezuela had not provided them with the ultra-low financing rates that they had been promised.” 2. Venezuela’s oil export to the USA is at its lowest since 1986 and further decreasing, since the USA has become, from an oil importing, an oil exporting country. Oil sands from Canada fill the Houston refineries and new pipelines are being constructed to guarantee a continuous stream of crude. Desperately, Venezuela has been looking for new markets, but with little success. The sales to Asia are, due to high transportation costs, far too expensive. 3. The local market of Venezuela of 700,000 barrels per day, enjoyed a price of only a few cents per gallon, which is far below cost price of extraction and refinery. Inevitable and eventually, Venezuelans will have to start paying normal prices for their gas at the pump.

So, State income of Venezuela has collapsed, and hugely expensive social programs can no longer be financed. A central command economy, with exchange rates and retail prices set by the government, is not very realistic, since local production dried up, and nearly all goods have to be imported and bought for hard currency. So, no matter who will be in power in Venezuela, a new and painful rebuilding of the economy, based on productivity and world markets is inevitable. The 17 Caribbean countries, that benefitted so nicely from the Petrocaribe agreement, will face the same dilemma. Piggy backing of the Venezuelan Bolivarian grand gesture is over soon. All 17 countries will have to increase their productivity dramatically and start paying market prices. The “manana mentality” of the islands is no longer sustainable. Since change of a culture takes time and leadership, it is likely that the Caribbean, consequently, will slide into a deep and lengthy economic recession.”